Sasol - from blue chip darling to out of favour on the bourse
In 2014 Sasol’s total borrowings were only 50percent of earnings before interest, tax and depreciation and amortisation (Ebitda) and is now fast approaching 3 times Ebitda.
Assets in Sasol’s Chemical Cluster increased to R313billion from R96bn in 2013, while assets in the Energy Cluster increased by less than R20bn to R87bn. The original estimates for the LCCP in Louisiana would cost $8.9bn (R131bn) to build, but the several cost revisions since has a cost-to-completion range of between $12.6bn and $12.8bn.
The completion date has also been pushed out. The project is at long last nearing completion with almost 94percent built.
Apart from the problems at LCCP, Sasol’s financial position was under severe strain by its operations in its Chemical Cluster as ethylene prices in US dollars slumped by almost 80percent since 2014, while the price of High Density Polyethylene fell by more than 40percent. According to my calculations the return on capital employed in the Chemical Cluster fell from 30percent in 2014 to nil in 2019 and took Sasol’s return on capital employed down with it.
Sasol was saved by its Energy Cluster. Although the cluster’s return on equity sank with the lower oil price in rand terms, the return on equity remained above 25percent. The cluster’s returns lagged the increase in the oil price in terms of rand in 2018 and 2019, but upgrading work at Secunda Synfuels to extend the life of the operations had a negative impact. According to company reports the plant is back to full capacity and production is likely to be up by more than 3percent in the 2020 financial year. Financial results in the Energy Cluster will also be boosted by increased mining productivity.
While ethylene prices are likely to remain under pressure due to the weak global economy and the ongoing feud between China and the US, things are also starting to look up for Sasol’s Chemical Cluster. The old wood (the former joint chief executives) got chopped. Sasol is now expecting LCCP to contribute between $100m and $200m to Ebitda in the 2020 financial year and $1bn by 2022.
The biggest threat to Sasol is its borrowings. Due to the completion of LCCP being pushed out Sasol had no choice but to push the maturity of its debt out from 2021. Eighty percent of the firm’s debt is now due four to five years from now while more than 90percent is dollar-denominated. Management is obviously acutely aware of that and is in the process of disposing non-core assets of $2bn.
Sasol’s attributable earnings was significantly impacted negatively by the re-measurement of items of R18.6bn and include once-off items such as impairments of almost R13bn.
Further planned shut-downs in the 2020 financial year will have a negative impact on Sasol’s profits while the adoption of IFRS on leases may influence results. The improvement on the operational and financial sides could provide a welcome boost to Sasol’s earnings in the 2020 financial year. The ramp-up of production and removal of bottle-necks at LCCP over the next two years are likely to underscore Sasol’s earnings growth.
Due to the company’s high gearing and the massive debt to be settled four to five years from now, you should expect Sasol to be very stingy with dividend pay-outs.
The impact of Sasol’s atrocious performance since 2014 can best be explained when compared to Steinhoff. Sasol’s market capitalisation was 6.1percent of the FTSE/JSE All Share Index’s market capitalisation in 2014 and is now only 2.6percent - yes, 3.5percent has been decimated. That compares to Steinhoff’s market capitalisation of 4percent of the All Share Index’s market capitalisation just before Steinhoff’s implosion. So, yes, the impact on a portfolio with market-weighted holdings in Sasol and Steinhoff was similar.
Risks are galore, but it just seems that Sasol is offering value, specifically with the company’s market capitalisation at a deficit of R36bn to its shareholders’ interest. It effectively indicates that the market could be anticipating further losses or write-offs of R36bn. The turn can be huge, though.
Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. He has no direct exposure to Sasol. You should consult your broker and/or investment advisor for advice.